How to ensure optimum growth in a retirement portfolio

Jayant Chaterjee is worried about his retirement savings. He has maximised his contribution to employment retirement plans and has also earmarked a portion of his savings to the PPF and other investments. However, Chaterjee has discovered that in 10 years of investing, the corpus has not grown as much as he had expected it to and is worried about being on target. He wants advice on the reasons for this under-performance.

It seems that Jayant Chaterjee's portfolio is too conservative and inadequately diversified since most of his retirement savings are in debt-oriented investments. To correct this, he needs to review his asset allocation. Given that his retirement is several years away, he should ensure that a substantial portion of his portfolio is in investments such as equity, which give higher returns. He has time on his side, which is important while investing in assets whose returns are volatile since the risk reduces as the holding period increases. He should recast his asset allocation so that his retirement portfolio focuses on growth rather than income at this stage. The best way to do this would be to raise allocation to non-debt investments periodically and make lump-sum investments as well so that, over time, the asset allocation is aligned to his requirements.

Another reason for the under-performance of Chaterjee's portfolio may be that he is not weeding out the investments that are not performing well. This can pull down the returns of his overall portfolio. He must put in place a system for periodic review of the performance of each investment and exit those that are consistently under-performing their benchmarks and peer groups.

Chaterjee must consider the tax efficiency and costs of his investments since both will have a significant impact on the returns of a long-term retiral portfolio. A product with higher cost must justify its inclusion with better returns. As far as possible, his investments should be kept simple and automated so that he is not required to make frequent decisions. By doing so, Chaterjee will have a well-managed portfolio aligned to his retirement targets.

The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Sunita Abraham, Girija Gadre and Arti Bhargava.